Swing Point Entries Trading Strategy

Additional Swing-Point Entries

In Chapter 6 the technique of swing-point violation entries was covered. All of the examples in that chapter had one thing in common, though. All the swing points occurred after the reversal point in the potential trade area. What if there was no tradable swing-point after the reversal? Could a swing- point that occurred before the reversal be used? And what about using a swing-point that forms between a double bottom or a double top?

I have seen a fair amount of work discussing the relative merits of swing- points before and after a reversal pivot point. Some authors say that a swing- point before a larger scale pivot is more important and more useful. Then others say a swing-point after the pivot is the one that carries the most weight for trading purposes. What about a swing-point when the reversal pivot point actually has two points to it, i.e., a double bottom or a double top?

In doing extensive experimentation with respect to my own trading, I discovered that it didn’t seem to matter all that much which of the three swing-point variations I used for my trading. What did matter was that the swing-point was formed with a certain proportion and had a certain character. I covered that proportion and character in extensive detail in chapters 6 and 7, and it applies just the same for swing-points that occur before the reversal pivot and for swings that form as part of a double bottom or double top.

Keep in mind, when I use the terms ‘double top’ and ‘double bottom’ here, I don’t necessarily mean in the classical sense. In fact, if the swing-point is to have the characteristics I have mentioned, it would be precluded from the classical definition of ‘double top’ or ‘double bottom’, simply because the two points would be way too close to each other. The term will be used here just for the convenience, and it shouldn’t be confused with the much more spread-out classical version of the term.

One thing I have noticed is that I find a lot more trades with the swing point after the pivot (reversal) point than before the pivot. Although there are plenty of these swings to be found before the pivot and a fair amount of the double top and double bottom types, I still see a lot more after the pivot as a percentage of the total opportunities. In general, then, if I want to use the swing-point techniques I focus on swings after the pivot, and keep an eye out if something nice shapes up before the pivot, or ‘around the pivot’, in the case of the ‘double’ formations. This will allow me to utilize these pre-pivot swings if they occur, and if they don’t, I simply look for another entry technique.

Let’s start out with an example in AMZN. There is a potential trade area on the 60-minute chart. I’ve dialed down to the 15-minute to look for an entry. AMZN has penetrated the upper end of the potential trade area and is starting to pull back. See figure 8.1.

At this point I would be willing to take a trigger because AMZN has penetrated the potential trade area. As this chart lays out right now, though, I have a few options, or at least potential options. If AMZN starts to go up right from here, and if I like the swing-high that has just formed (the pullback so far has penetrated a 50% retracement), I can use a trade above that high as a trigger. I could also use the swing-high that formed just before AMZN dropped into the potential trade area, again if I liked that swing- point. What I want to do is form possible scenarios, and whether or not I would consider the triggers, so if they happen, I’ll know how to react. Let’s move ahead on the chart and reassess. See figure 8.2.

AMZN didn’t go up from that last point; instead, it went down and set a nominal new low for the move. This sets up a potential ‘double bottom’ and defines a swing-high point that I would consider acceptable for a trigger. This goes on the assumption that AMZN doesn’t do anything I don’t like before the trigger is hit, and that AMZN starts toward the trigger fairly soon.

It’s hard to describe what price action would invalidate the trade for me; I just know it when I see it. The best thing I can say is that I’d really prefer for the price to just do what I expect, and that is to tum somewhere in here and go up in an orderly manner. Anything that deviates too far from that and I’ll reconsider taking the trigger. I’ll label the trigger on the chart with a horizontal line. See figure 8.3.

There’s nothing to do now but watch and wait, and see how AMZN reacts to this area. The trigger is set, and unless some new price action comes in that invalidates the current trigger, I’m in watch mode. Let’s move ahead a few bars and see what happens. See figure 8.4.

That’s it. As can be seen on the chart, the trade has triggered, and it has done so on the first bar of a new day’s trading action. Let’s move ahead a bit and see how AMZN is acting. See figure 8.5.

There was a small pause in the area of the break (which we now know is not uncommon), but then AMZN started up strong. Unless you thought that tiny rest was enough of a pullback to try and use for entry (it certainly doesn’t meet the criteria I have presented thus far), you had no swing-point or pullback opportunity at all once AMZN started up. Let’s move farther ahead and analyze how AMZN is behaving. See figure 8.6.

AMZN is just rocketing up. There was one additional, small pullback on the way up, but it would not be the type I would use for entering a trade. If the highlighted swing-point was not used for entry, that was the last chance for this technique, as I’ve outlined it. This is one of the reasons I utilize this technique when given an opportunity. I’d hate to be left on the sidelines in a potentially great trade, waiting for a post-pivot swing-point that never comes. Let’s advance a bit more and make another assessment. See figure 8.7.

AMZN had a congestion/rest period and then just started up again, and on a big gap (this might be considered a ‘continuation’ gap). Although there may be a potential trade entry in this area, it is so far above the potential trade area that it would be an entirely different trade at that point. Any trade entry based on the potential trade area has either long since been executed, or long since abandoned. My point for showing this additional data is to demonstrate how sometimes, if an opportunity is presented and passed over, no more opportunities may be presented.

Now some of you might be thinking that there was another potential swing- point entry that I haven’t mentioned, and you’d be correct. What about the swing-high point that stood out fairly well, before AMZN penetrated the potential trade area? I’ll highlight that potential swing-high trigger with a horizontal line, and back up the chart on AMZN to the point where it was just bouncing for the first time off the potential trade area. See figure 8.8.

This is a great observation, noting this swing-high as a potential trigger. The character of the swing, and its placement with respect to the potential trade area, make it acceptable for me. At this point on the chart, an assessment has to be made. The question is, if AMZN goes straight up from here and takes out that trigger, would that meet your own personal criteria for a trigger? For me, the answer is yes. I definitely would have this line on my chart, and I would be ready for that scenario to play out.

I didn’t present this at first because I don’t want to present multiple possibilities when I first introduce a concept, it may get too confusing. Once I feel the reader is likely to have the basic idea, I then feel it makes sense to present multiple choices and opportunities at the same time. One has to walk before one can run. Let’s see how this potential trigger would play out. We’ll move ahead on the chart and reassess. See figure 8.9.

As soon as I see AMZN in this position, I would immediately abandon the highlighted trigger in favor of the lower potential trigger. This puts us in the position we were in, in Figure 8.2. This is the point where I added in the horizontal trigger line on this new swing-high point. I’ll add it back in, retaining the current horizontal trigger line for comparative purposes. See figure 8.10.

Now, using the same assumptions as before, I would focus on the lower price trigger, having this newer trigger supersede the higher price trigger. As a potential trade evolves, I make constant assessments and changes in my plan. When I see a potentially better trigger come up, I frequently ‘upgrade’ to that trigger. It’s an ongoing, evolving process.

Let’s move on to another example. I want to point out, though, that I chose the last example with AMZN because it had less than ideal price action. I will choose the next two examples trying hard for them not to be too ‘well- chosen’. I’ll select them both to be a bit choppy, with the pullbacks not being the most perfect, textbook pullbacks. The last example in this chapter, with CAT, will be slightly illiquid in the chosen timeframe. I’ve done this on purpose, to reflect what a less than ‘perfect’ behaving trade may look like. I’ve attempted to do this throughout my works, but I’ve particularly focused on this with the examples in this chapter.

There is a potential trade area on the 60-minute chart on YHOO. I’ve dropped down to the 15-minute chart to look for an entry trigger. I’ll add a lot of data onto the 15-minute chart to give you some perspective for the potential trade area as YHOO approaches it, but generally I’d spread the data out a lot more and only focus on the price action on the trigger chart as it comes into the area. See figure 8.11.

Let’s move ahead one more bar and see what happens. See figure 8.12.

YHOO has penetrated the potential trade area, and I would now be willing to take an entry trigger. I will watch as the potential trade unfolds and make assessments as time goes on, trying to decide on a trigger. Let’s add two more bars and see if I can decide on a trigger. See figure 8.13.

YHOO has bounced off the potential trade area, and I’m thinking that if it just rockets straight up from here, I’ll miss the trade. That’s a downside to triggers that key off of swing-points. If you don’t get any swing points, you don’t get any triggers. If YHOO just went straight up from here, would other triggers, like moving average crossovers or trendline violations, work?

Yes, these triggers could be utilized in this case, since they don’t require any swing-points to be triggered. But perhaps you’ve decided you want a trigger that is based on a swing-point violation for this trade. Then all you can do is wait for the trigger to set up, and if it doesn’t, you have to let the trade go by. I’ll add two more bars and see what YHOO is showing us. See figure 8.14.

Now that’s a quick change. YHOO decides to set a nominal new low for the move, and test the lower part of the groupings (my potential trade area). Not only that, it sets up a possible swing-high point that I might use for a trigger. I want to see how YHOO behaves as the potential trade unfolds. If YHOO does what I want, then this swing-high point will make an excellent trigger for me. And what do I want? It should be clear by now. I want YHOO to reverse in here and start up, in a nice and orderly manner. This will be a subjective evaluation, and I do it based on my experience. Let’s go forward another bar and see what happens. See figure 8.15.

YHOO is reversing off the second move into the potential trade area, and I like the price action so far. I would now consider the swing-high point for a trigger, assuming YHOO keeps heading up in an acceptable manner. I’ll add in my horizontal trigger line at this point. See figure 8.16.

There is nothing to do at this point but watch as the potential trade unfolds, and assess the situation as necessary. I’ll add one more bar in and reevaluate. See figure 8.17.

YHOO is acting very well here, heading for the trigger. I would be very confident at this point that I have done a good job in choosing my trigger. I would expect that if YHOO is going to respect the potential trade area, it will overcome this trigger fairly soon. Let’s add another bar and see if YHOO triggers. See figure 8.18.

YHOO paints an inside bar, but still hasn’t triggered. If YHOO trades back down into the potential trade area, I would likely want to reconsider my trigger. I might be thinking that YHOO is congesting and trading sideways in the potential trade area, and that is something I don’t like to see. My experience, in most cases, has been that if I have chosen my potential trade area well, and the area is going to ‘play out’ and give me a good trade, something should happen pretty quickly, and usually decisively. I’ll add one more bar and we’ll evaluate the situation. See figure 8.19.

Well, I didn’t have to make any further assessments or make any other decisions, since YHOO triggered on the next bar. From what I see on the chart, I think the choice for a trigger was pretty good. Let’s see how this played out. See figure 8.20.

YHOO pretty much just blasted off this area. There was some ‘congestion’, or a pause of sorts that is barely visible on this chart, right after the trigger point. There aren’t any good swing-points for entry from my perspective, though, once the trigger was hit. Let’s do a close up of the price action after the trigger. I’ll do a horizontal line trigger on that ‘rest area’ after the trigger, so we can do an assessment on that spot as a potential trigger. See figure 8.21.

Although the second trigger line up at $18.02 could have been used as a trigger, the swing-point sure didn’t meet my criteria. If you were to look at the next swing-point up from there, you’d be way too far up for me to take the trade as it relates to the potential trade area. This is another example of the highlighted swing-point as the last chance for using that technique. Again, this is why I watch for these opportunities as they unfold. I’ll show one more chart of YHOO, this time the traded timeframe, which was the 60- minute chart, to show the larger perspective. I’ll put the trigger line on the chart so it is easy to see where the potential trade started. See figure 8.22.

I’ll present one final example with CAT. There is a potential trade area on the I5-minute chart. This area also corresponds with a trendline, which is quite prominent on the 60-minute chart. Let’s start with the 5-minute, trigger timeframe, as CAT heads towards the potential trade area. See figure 8.23.

Let’s move forward in time and assess the situation. See figure 8.24.

CAT didn’t penetrate the potential trade area as expected, but instead bounced up a bit. It has then started to roll back over and head towards the area. In doing so, though, it has created a fairly nice swing-high. The swing- high doesn’t have that picture perfect look to it, it has more of a slightly illiquid trading look to it, but it is potentially more than adequate for trigger purposes. I’ll add one more bar to the chart. See figure 8.25.

CAT has now bounced off the top of the potential trade area and the trendline. I would actually prefer that it trades through the top area just a bit, but I would now accept a trigger. I would consider the swing-high I mentioned as an acceptable trigger. I’ll label the swing-high with a horizontal trigger line. See figure 8.26.

Now I just wait and see how CAT behaves and if the trade is triggered. I qualify this, as usual, by mentioning that any price action that I don’t like will have me ‘pulling’ the potential trigger. Let’s move ahead several bars and reassess. See figure 8.27.

CAT has done what I had hoped it would do, and that is to penetrate a little bit further into the potential trade area. If it trades up from here and triggers, I would take the trigger. If CAT continues down and trades below the potential trade area, I would cancel the trigger and no longer consider the trade. Also, if CAT, for example, traded sideways in here for any sustained period of time, I would also cancel the trigger. Let’s move ahead a few bars and see what happens. See figure 8.28.

CAT has now triggered on a small gap up shortly after the open of a new trading day. Let’s add two more bars in and see how the trade is progressing. See figure 8.29.

CAT is really going, as it takes out that swing-high trigger. Let’s add a bit more data and see how this one played out. See figure 8.30.

CAT really launched off this potential trade area, and didn’t give much in the way of swing-points/pullbacks on the way up. Although the quality of the swing-point used to trigger this trade wasn’t the greatest, it was as good as I would expect, given the behavior of the issue up to this point. For my trading, I felt the 15-minute traded timeframe was adequately liquid for trading, but the trigger timeframe was getting close to not having good enough behavior to trade.

Given that the 5-minute timeframe is not the traded timeframe, I might be a bit more lenient in assessing the character of the price behavior. Still, I need a minimum quality to the swing-points and pullbacks in order for me to consider their use as potential triggers. What all that boils down to is that although this swing-point trigger wasn’t the best I have seen, it did turn out to be the best, and only, swing-point trigger that met my criteria for this trade.

I’ll finish this example, and chapter, up by zooming in on the potential trade area and trigger area and looking at two other potential entry triggers at the same time as this swing-point entry trigger, for comparison. First, I’ll add on the 10-period exponential and 20-period simple moving averages. I’ll look at the moving average crossover trigger. See figure 8.31.

Notice how the trade triggered one bar after the swing-high trigger, and at a slightly lower price. All in all, though, the trade triggers at a very similar spot. Let’s throw in a trendline, for use in the trendline violation technique, and see where that trigger. See figure 8.32.

The trendline trigger also produces a very similar entry. If you waited until the first close above the trendline, your trigger price would be lower than the swing-point entry, at least in theory. It’s hard to estimate what an actual fill price might be, and, again, discussion of the prices in this regard is only for comparative purposes. The lesson is in how close these trigger prices all are to each other.

I hope it was clear in this chapter just how similar the application of these techniques is to the presentation made in chapter 6. For all intents and purposes, I trade all three variations of the swing-points pretty much the same. My main concern is the quality and character of the swing-point and its pullback, and how it fits in the context of the current price behavior. I’m not near as concerned with where the swing-point occurs.

In the next chapter, I’ll introduce one of my favorite variations on an entry technique that I presented in an earlier chapter.